David Morris

Wednesday, global stock indices took a dive as Italian bond yields soared. Having waved off George Papandreou as Greek Prime Minister, bondholders turned their attention to Italy. Investors began to panic as the yield on Italy’s 10-year BTPs flew above 7 per cent – a level which saw Greece, Ireland and Portugal require emergency aid. Italian bonds fell despite intervention from the ECB which has been busy buying up the country’s sovereign debt in the secondary market. With the credit default swap market no longer functioning as an effective insurance instrument – thanks to confusion over what constitutes a default – bondholders were forced to reduce their exposure to Italian sovereign debt by outright selling. There was a sharp bounce on the expectation that Prime Minister Silvio Berlusconi would resign with former EU commissioner Mario Monti taking his place. Yet the market showed yet again that it is generally better to travel than arrive, and the relief rally at the end of last week fizzled out in early trade yesterday.

Last week’s sell-off in Italian bonds also led to a pull-back in the price of oil. Investors rushed to take profits following a week-long rally which drove both WTI and Brent up through their respective 200-day moving averages (DMA), and a downtrend which has been in place since the summer. Yet despite the midweek sell-off, $112.20 is holding as support for Brent, while WTI continues to distance itself from its own 200-DMA around $95.

WTI is now back up to levels last seen at the end of July, and $99.60 is the next important resistance level. This marks the 61.8 per cent Fibonacci retracement of the sell-off from May to October this year. Brent’s first significant resistance level comes in at $116.60. Both contracts have risen on growing geopolitical tensions. A report from the International Atomic Energy Agency has raised fears about Iran’s nuclear ambitions and its military potential. In addition, inventory data from the Energy Information Administration showed a bigger than expected drawdown in US stockpiles. But without a lasting solution to Europe’s debt crisis, fears of slowing global growth will once again materialise, and this will once again put downward pressure on oil prices. As usual, what happens to the euro dollar currency pair remains crucial.